
Asia GPs fear LP portfolio concentration - survey

Large LPs concentrating their GP relationships is comfortably the biggest fundraising challenge facing private equity firms in Asia Pacific, according to a survey featured in the latest edition of Dechert’s global private equity report.
Nearly one-third of Asian respondents identified this as their biggest concern; in North America and Europe, the Middle East, and Africa (EMEA), it was cited by just 9% and 17%. In North America, competing against other managers for capital – especially larger and more diversified players – is seen as the biggest challenge. In EMEA, it is securing smaller commitments (less than USD 100m) from large LPs.
Those issues were each flagged by 15% of Asian respondents. The same number highlighted the opening up of private equity to high net worth and mass affluent investors – which is regarded as a much greater complication in Asia than in Europe and North America. Conversely, Asian managers are markedly less bothered than their global peers by negative perceptions of slower fundraising processes.
The primary concerns raised in each market – LPs reducing their GP relationships, mismatched competition for capital, and large LPs writing smaller cheques – point to a broader fundraising reality: large-cap, multi-strategy asset managers are absorbing an ever-larger portion of capital allocated to private markets. Dechert believes the slowdown in fundraising will exacerbate this effect.
"In the challenged market conditions that we're in right now, LP committee members are going to naturally be inclined to commit to larger well-established funds. That's why newer funds and those raising for frontier markets are finding it harder now, too," said Sabina Comis, Dechert's global managing partner.
"The big pension funds in particular also want to write large tickets and only have so much resource to conduct due diligence on the universe of thousands of PE funds, so there's a capital efficiency element there as well."
The survey also looked at alignment of interest at the fund level. Last year, nearly two-thirds of respondents said that LPs were asking for higher GP commitments to funds. This has fallen to 38%, seemingly in recognition that slower exits mean managers have less cash to put into their own funds. However, half of Asia-based managers said larger GP commitments is still on the LP agenda.
Asia trails the global average (45% to 56%) in terms of senior leadership in the GP forgoing a portion of their carried interest split to attract, retain, and incentivise more junior staff. On other alignment issues such as hurdle rates, Asia is much like other markets.
Dechert described the hurdle rate issue as a "striking reversal." Last year, as central banks began hiking interest rates, more than half of GPs said LPs were asking about increasing hurdle rates. That has now fallen to about one-third. Meanwhile, following downward pressure on asset prices, over half of managers say they are talking to LPs about lowering hurdles and increasing team carry participation.
The industry standard for hurdle rates is 8%, although it is often increased in line with interest rates to reflect expected performance above the risk-free rate, Dechert noted. However, when fund performance lags and there is little chance of hitting 8% and triggering carry, the rate might be lowered to re-incentivise the manager and ensure it doesn't take excess risk in the hope of reaching 8%.
According to 60% of survey respondents, there is a moderate to very high risk that they will fail to meet hurdle rates due to valuation deceases in 2023. However, Asia-based managers are more positive, with only 45% taking this view. They are also more bullish on exits, with 35% saying market conditions will be favourable for liquidity events over the next 12 months, compared to 17% globally.
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